This is number 19 in a series of articles which summarize proposed reforms

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Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation.
John Maynard Keynes

          The functions of government include protecting life and property and providing whatever currency and credit is needed to support economic freedom. Adam Smith proposed that this money should be a simple medium of exchange and kept from the speculators, “prodigals and projectors” as he called them. In the 2007-2009 recession, tens of millions of jobs have been lost, and the living conditions of wage-earning families have been severely damaged by extreme violations of this free-market theory.
          The government’s mistake began in 1974 with the Employees Retirement Insurance Act (ERISA) when they did not direct trillions of dollars of mandated pension savings towards the job-growth economy. Lacking direction, money will always go to speculative ventures that have the appearance of quicker gain. This government failure to distinguish between investment in economic growth or speculation resulted in funding the dot-com bubble, and then the real-estate and credit bubbles.
          The function of bankers is to make judgments on the quality of their loans. But the bankers were no better than the government in distinguishing between investment in economic growth or speculation. Deregulation and the introduction of derivatives piled on more liquidity. While the quality of loans was going down, incredibly, bankers did not know what the instruments were worth and instead of starving the speculators they fed the frenzy while neglecting to reflect increasing risk in the cost and supply of money or the size of their reserves.
          Alexander Hamilton, the first Secretary of the Treasury, gave easy-credit privileges to the establishment in exchange for their participation and financial support. When Jefferson became president, he promised to “bring this powerful enemy to a perfect subordination,” but Hamilton’s structure was already in place, and Jefferson did not know how to reform it.
          The next president, James Madison, allowed greater dominance by finance capitalism because the bankrupt government needed their help to fund the War of 1812. After the war, pent-up demand accelerated economic growth that then surged into asset inflation of stocks and real estate. This first business cycle climaxed and crashed in the first recession caused by speculators using borrowed money. During the Panic of 1818, a half-million urban workers lost their jobs, and thousands were jailed for debts less than $20.
          The battle went on between the few protecting their privilege to speculate versus those angry over the repetitive damage done to ordinary people. The first Populist president, Andrew Jackson, won a battle by vetoing the National Bank, but he lost the war when the State banks he favored provided easy credit for speculators and caused the recession of 1837. Easy credit caused recessions again in 1857, 1873, and 1893. In 1913, the Federal Reserve Board was founded, but reflecting the priorities of Wall Street, its mission was to fight price inflation that erodes the wealth of the few but not asset inflation in stocks and real estate that causes recessions and damages the many.
          Many who favor a collectivist type of centrally planned government were quick to identify the Crash of ’29 and the following Great Depression as evidence of fatal flaws in capitalism. The flaw was, instead, a failure of government and banks to limit easy credit for speculation during the 1920s, followed by further government blunders: raising taxes to 63% retroactively, shrinking the money supply over 30% in two years, and legislating protectionist tariffs. The government did not use available tools to restrain the business cycle, and then it belatedly used the same tools after the crash by raising interest rates and by cutting credit even for good companies.
          Finance capitalism has dominated the system but never to the extent of the last quarter century. ERISA mandated pension funding added as much as $100 billion a year for investment, but Wall Street lobbying has resulted in its benefiting the handlers of the money. During this time, wage-earner capitalists have sat there passively while Wall Street handlers charged exorbitant fees for investing in bubbles that eventually caused the unnecessary recession. Wage earners, in effect, have funded much of the devastation of their own retirement accounts.
          The reforms under way in late 2009 are damage control that will only put the Wall Street Humpty-Dumpty back together again. The “reformers” neither address how to fight asset inflation to prevent future recessions nor how to identify and support the new, improved capitalism.